Oil recovers to over $105 after earlier sharp fall

The price of oil recovered to trade above $105 a barrel Monday, having earlier fallen on the back of a sharp drop in Japan's Nikkei stock index.

By early afternoon in Europe, West Texas Intermediate, the benchmark for U.S. crude, was up 57 cents to $105.27 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell 79 cents to close at $104.70 on Friday in New York.

Earlier in the session, the WTI traded as low as $103.87 as the benchmark index of Japan's stock market, the Nikkei 225, fell 2.5 percent due to the strengthening yen and worries about China's economy. However, a solid performance by European markets and an anticipated steady opening on Wall Street helped support oil prices.

Traders in all financial markets have a lot to digest this week. The main focus will be on whether the U.S. Federal Reserve will provide more clarity as to when it will start scaling back its monetary stimulus. The Fed has been buying $85 billion of financial assets a month in an attempt to keep long-term borrowing rates low and help shore up the U.S. economic recovery. A lot of that money has found its way flowing round financial markets and that's helped oil prices.

However, the program is widely expected to be scaled down later this year as the economy improves.

Oil prices have also swung to the tune of developments in China. Last week, they fell as China, a major energy consumer, decided to press ahead with painful economic restructuring and forgo another round of stimulus even though growth has slowed.

The price of oil broke above $100 on July 3 for the first time since May 2012, mostly due to falling U.S. crude stockpiles and increased interest from financial investors.

Brent crude, which is traded on the ICE Futures exchange in London, was up 64 cents to $107.81 a barrel.

Analysts noted the newly widening gap between Nymex and Brent. Over the past weeks, WTI had slashed off most of its $20 discount to Brent and even briefly traded higher that the London contract, partly on the back of four straight weeks of declining U.S. crude stockpiles. Now the gap again is above $2 in favor of Brent.

"It therefore appears as if the WTI bull-run is over for the moment," analysts at JBC Energy in Vienna said in a report. "Despite hefty stock draws, U.S. crude stocks remain well above the 5-year average."

Analysts at Commerzbank added said the Nymex contract had developed a "considerable potential for correction, which points to further price falls in the coming days."